Income Tax Rules 2026 explained: PAN, HRA, perks and more

India’s 65-year-old Income Tax law regime is finally set for a replacement. The new Income Tax Act, 2025, along with the Income Tax Rules, 2026, will come into force on April 1, 2026. On February 8, this year, the tax department released a set of corresponding draft ‘Income Tax Rules, 2026, and related Forms’ for stakeholder consultation. All the suggestions received are now under review and will be adopted in the final rules, if found appropriate. Its final notification is expected in the next few days. Let us look at the proposed changes:

Income Tax Rules, 2026

Permanent Account Number

The draft ITRs, 2026, proposed major changes to the mandatory PAN requirements. Rule 159 lists out 16 transactions for its mandatory quoting. To avail credit card, open an account with depository, purchase of mutual funds above Rs 50,000, purchase of securities above Rs 1 lakh per transaction, cash deposit aggregating to Rs 10 lakh in one or more account, cash withdrawal aggregate to Rs 10 lakh from one or more bank account or post office, sale or purchase of motor vehicle and motorcycle above Rs 5 lakh (currently, motor vehicles only), buying unlisted shares amount exceeding Rs 1 lakh per transaction, purchase or sale of gift or joint development agreement in case of immovable property above Rs 20 lakh (currently, Rs 10 lakh), payment exceeding Rs 1 lakh to a hotel/restaurant at any one time (currently, Rs 50,000) and sale or purchase of goods or
services of any other nature exceeding Rs 2 lakh per transaction, among others.  

House Rent Allowance

HRA, inserted in 1964, to meet the dwelling house’s rent-related expenses. Since inception, the I-T law has recognised only four cities — Chennai, Kolkata, Mumbai and New Delhi — as ‘Metro Cities’ for 50% of the basic salary and 40% in the case of other cities for computation.

Interestingly, the Constitution of India in June 1993 itself recognised other cities such as Bengaluru, Coimbatore, Hyderabad, Kochi, Madurai, Thiruvananthapuram, and others, as ‘metros’. After more than six decades / three decades, Bengaluru, Hyderabad, Pune, and Ahmedabad finally made in to the list. It is a taxpayer-friendly change brought without waiting for the completion of the long-pending Population Census-2027, which is yet to commence in April 2026.  

Further, HRA-related ‘Form No. 124’ explicitly seeks the ‘Relationship with the landlord’, meaning, hereinafter the taxpayer, needs to disclose whether he/she is paying rent to whom and under what capacity. That is, the tax department can easily analyse the pattern across the country and know whether the rent is genuine or using parents, siblings or close relatives for tax savings.

Outdated special allowances

There are allowances for employees working under certain conditions. Children’s education allowance — Rs 100 per month/child, up to two children, now proposed to increase to Rs 3,000 per month/child, up to two children; to meet hostel expenditure of an employee’s child — Rs 300 per month, up to two children, now proposed to increase to Rs 9,000 per month per child, up to two children.

Tax-free perquisites

The draft ITRs, 2026, have also proposed to simplify perquisite valuation rules, upward revision of tax-exemption limits on car, chauffeur, gifts, meal vouchers, educational and medical benefits. Motorcar partly used for official, and if running/maintenance borne by employer, upward revision is Rs 5,000 per month — up to 1.6-litre, or Rs 7,000 per month — above 1.6-litre + Rs 3000, if chauffeur provided. Car partly used for official, and if private expenses borne by employee, upward revision is Rs 2,000 per month — up to 1.6-litre, or Rs 3,000 per month — above 1.6-litre + Rs 3,000, if chauffeur provided.

Similarly, a gift from the employer — up to Rs 15,000, meal vouchers — up to Rs 200 per meal, education facility — up to Rs 3,000 per month/child and loan for medical treatments — up to Rs 2 lakh.

Related I-T forms

The draft ITRs, 2026, has proposed a complete revamp of the existing forms. Change in the number of commonly-used forms is — PAN application Form No. 49A to be renamed as Form No. 94, TDS Certificate-Salary Form No. 16 as Form No. 130, TDS Certificate-Others Form No. 16A as Form 131, Form 26AS as Form 168, etc.

The total number of Rules and Forms will be reduced from 511 to 333, and from 399 to 190, respectively. As many as 178 current rules and 209 forms have been rationalised and removed, if not required. The new law’s core objectives are simple language, digital and easier compliance, a taxpayer-centric approach, transparency, and aligning with best global practices.

(The writer is Founder & CEO, Shree Tax Chambers)